LEGAL MATTERS: Credit or Debit Card When Holiday Shopping?

To enjoy the benefits of the most favorable consumer protection laws this Holiday season, leave your cash, checks and debit cards at home and shop with your credit cards.  But do not confuse your Visa credit card with the debit card your bank gave you that happens to have the Visa logo on it.

Understanding the difference between debit and credit cards

Things were simpler years ago: your bank issued you a debit card, then known as an ATM card, to withdraw money from your accounts and only your credit cards carried a Visa or MasterCard logo.  The line between credit cards and debit cards is blurred today but there are important differences between the two. 

A debit card is tied directly to your bank account; when you use it, your bank immediately takes money out of your account. If you use it at an ATM machine, the bank takes the money out of your account and gives you cash.  If your debit card has a Visa or MasterCard logo, and you use it while shopping, the bank immediately takes the money out of your account and sends it to the merchant you are dealing with. 

A credit card is not tied to your bank account; when you use it, the institution that issued the card extends credit to you, it pays the merchant you are dealing with, and sends you a bill at the end of the month for everything you bought using the card. If you do not pay the bill in full, they are happy because they get to charge you interest.

What can be confusing is your bank may let you use your debit card to pay for things even if you do not have enough money in your account.  In those cases, the bank extends credit to you by allowing you to overdraw your account. The bank does not do it to be nice; it does it to make lots of money - it probably charges you a $35 fee each time it allows you to overdraw your account. So if you use your debit card to buy your Aunt Matilda a $20 fruitcake, but you only have $19 in your account, your bank may loan you the $1 you are short and then charge you a $35 fee.

If it is not a credit card, why does the cashier ask me ‘debit or credit?’

Despite what you may think when a cashier asks you “debit or credit,” you cannot turn your debit card into a credit card.  What the cashier is really asking is how the transaction will be processed. If you say ‘credit’, it is processed one way and you will probably have to sign your name. If you say ‘debit’ it is processed another way and you will probably have to punch in your PIN. Most stores prefer to process your card as a debit card because the processing fees they pay for debit transactions are lower than for credit transactions.

Which is better?

Federal law offers more protections to consumers who use credit cards than to those who use debit cards.  The biggest difference is that you do not have to pay credit card bills for goods and services you do not receive.  So if you bought the fruitcake online using your credit card, and the merchant goes bankrupt or just does not bother delivering it, you will not have to pay the credit card bill.  Similarly, if you pay for a trip with a credit card but the travel provider goes out of business before you travel, you will not have to pay the bill. 

There are other differences as well.  For example, if your credit card account number is stolen, you are usually liable for only the first $50 of fraudulent activity; the limit is typically higher for debit cards.  Also, if you have a dispute with a merchant you paid with your credit card, your credit card company may have to help you resolve it and you might not have to pay the charge; if you paid with your debit card, your bank does not have to help and it won’t ever give you your money back.  Finally, using your credit card builds your credit history and can earn you reward points; using your debit card does neither.

Learn more about the Fair Credit Billing Act that protects you when you use your credit cards:  http://ftc.gov/bcp/edu/pubs/consumer/credit/cre16.shtm

Learn more about the Electronics Funds Transfer Act that governs debit card transactions: http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre14.shtm

John Longo is a consumer rights attorney practicing law in Rhode Island and Massachusetts. He represents consumers who have disputes with businesses, employees cheated out of their wages or overtime, car buyers stuck with Lemons, and people in need of bankruptcy protection. He is a member of the National Association of Consumer Advocates, the National Association of Consumer Bankruptcy Attorneys, and the Rhode Island Association for Justice.